One in five German workers have 'mini-jobs', according to the most recent employment figures. Photograph: Sean Gallup/Getty Images

The most recent copycat idea floated by the Treasury to promote employment creation through ever more flexible labour markets is the German "mini-jobs" initiative. Introduced in Germany in 2003 under the social democratic chancellor Gerhard Schröder as part of a wide-ranging labour market reform, the scheme has been praised for its alleged role in preventing a steep increase in German unemployment post-2008.

German "mini-jobs" are just what it says on the tin: precarious employment for up to €400 (£315) per month, likely to be extended to €450 in 2013. Whether a "mini-job" is an additional or a main job, "mini-jobbers" are exempted from tax and social insurance payments for earnings of up to €400, and employers' social insurance contributions are considerably below those for equivalent regular jobs.

"Mini-jobbers" thus forgo core benefits of regular employment, such as building up pension claims. Beyond a basic threshold, income from "mini-jobs" also entails the reduction of unemployment benefit for recipients. In March 2012, an initiative, led by the social-democratic governed Länder in Germany's upper chamber in March 2012, to impose a limit of 12 weekly hours for "mini-jobbers" – and thus effectively a minimum hourly wage – failed.

According to the most recent figures of the German Employment Agency, 7.3 million Germans, or one in every five employees, held "mini-jobs" in September 2010 – an increase of 1.6 million since 2003. The number of workers taking "mini-jobs" as additional side-jobs to make ends meet almost doubled from 1.3 million in 2003 to 2.4 million in 2010. About two thirds of "mini-jobbers" are women, and most "mini-jobs" are to be found in the low-skill segments of service sectors, led by catering, hospitality and construction.

While admitting that the scheme is costly for the state due to the exemptions from income tax, those advocating the scheme argue that it has not replaced regular employment and that increased labour market flexibility (meaning lower unit wage costs) has been instrumental in promoting German international competitiveness since 2003.

Unsurprisingly, the view from trade unions and sympathetic researchers is much grimmer: a 2010 report by researchers from the University of Duisburg-Essen, for instance, provides empirical evidence to show that "mini-jobs" are a growing low-wage trap with little prospect of longer-term transition, even into low-skill employment. Splitting regular jobs into mini ones is becoming more common. And "mini-jobbers" tend to be paid considerably less than the equivalent standard hourly wage for a given activity, nothwithstanding Germany's anti-discrimination laws that explicitly prohibit this.

To fully appreciate the impact of "mini-wages" on the German labour markets and economy, it is important to recall that Germany does not have a statutory nationwide minimum wage. Wages are negotiated by sector, and in only 10 of these agreed minimum wages, currently ranging from €6.53 to €11.53 (or £5.13 to £9.06), are binding for all employers. Of 41 million people in employment in 2011, only just above 29 million had regular jobs, with the remainder either being self-employed or in "mini-jobs". Real wages have stagnated since the 1990s and fallen by 2.9% between 2004 and 2011. Poverty in work is on the increase and income inequality is growing faster in Germany than in any other western European economy.

Far from achieving an employment "miracle", post-2008 Germany simply managed to not escalate an already high unemployment rate of about 7% by reducing working hours per person and implementing a fiscal stimulus package to the tune of €60bn in 2009-10. Nor does German GDP growth over the 2000s warrant the belief that labour market deregulation is the key to growth. With the second lowest growth rate (of about 1.7%) in the eurozone between 1999 and 2008, there is not much to write home about the famous German model economy.

Worst of all, the single-minded German obsession with low wages and "mini-jobs" has, of course, been a driving factor of the eurozone crisis: increased international competitiveness through falling unit labour costs sustained an export-led growth model that mostly siphoned off credit-fuelled demand in poorer southern European economies – until the cheap credit flow stopped in 2008.

As Heiner Flassbeck and Gerhard Bosch, among many others, have long argued, what Germany (and the eurozone) need is "maxi-jobs", not "mini-jobs": real wage increases above productivity and inflation, to correct current trends in German income inequality and to boost German demand at home and abroad.

The UK, of course, has a minimum wage, and the threshold for tax-free earnings is currently more than double the €400 limit in Germany. So why "mini-jobs"? The answer can be gleaned from another recent "bright" labour market idea: to force the long-term unemployed into months-long unpaid work at the risk of losing their benefits. This amounts to fixing an effective wage bottom for this group equal to their benefits, and thus below the minimum wage. "Mini-jobs" are set to follow suit for a much larger group of workers. This is their only purpose.

The simple truth is that "mini-jobs" are not working in Germany, and neither will they in the UK: the current crisis, in Germany and the UK, is a crisis of confidence in future (sales) prospects. Wages are costs for employers, but they are also the income that buys their products. Low-wage policies have had their day and have failed to produce the promised outcomes. Employers now need markets, and workers need jobs that pay to make a decent living. The solution is obvious, and it doesn't include "mini-jobs".